Morningstar has published a research paper analysing long-term investors’ mutual fund preferences as expressed in monthly asset flow data. The paper examines equity, fixed-income, and balanced funds globally to draw conclusions about how investors make investment decisions.
Key findings from the “What Factors Drive Investment Flows?” report:
- U.S. investors strongly prefer low-cost funds, but these preferences are virtually nonexistent outside of the United States.
- Indexed equity funds receive higher flows at the expense of active equity funds. The trend reverses for fixed-income and balanced funds, as investors globally favour active strategies.
- Investors expressed a strong preference globally for funds that invest in a socially conscious manner. Globally, equity funds that self-identify as socially responsible receive 0.40 percent greater flows per month than funds that do not.
- Investors globally respond to Morningstar ratings—both the quantitative Morningstar Rating™ (the “star rating”) and the qualitative Morningstar Analyst Rating™. Funds with a higher Morningstar Rating attract greater inflows than funds with lower ratings. The five-tiered Analyst Rating scale has three positive levels, indicating Morningstar Medalists—Gold, Silver, and Bronze—and has proved to be a strong asset flow indicator as well.
- Investors seek out funds from higher-quality firms, and a notable relationship exists between asset flows and portfolio manager tenure. Investors favour long-tenured managers and visible continuity of fund management, suggesting that funds with co-management and internal promotion practices are better insulated from the adverse effects of manager departure.
To read the full report, click here.